Upcoming US regulation: Authentic agony or a flesh wound?

The legislation that is coming from the United States is soon going to bite. At this point, it is still not clear what the precise outcome will be. However, some parts will be easier to comply with than others.

AsianInvestor spoke to duet of partners from law firm White & Case about the measures on the cards.

Firstly, there is good news for hedge funds. The Financial Services Reform Bill, which amends the Investment Advisers Act, will have a universal registration requirement. Depending on the size of the fund (a likely $100 million threshold), registration will either be with federal or state authorities. On balance, a manager would probably prefer the certainty of registering at a federal level.

"Registering under and compliance with the US Advisors Act really isn't very hard. There's no exam or capital requirements," says White & Case's David Goldstein. "However, the registrant has to disclose the names of its material owners and other information that investors would be interested in, such as whether any principals have been convicted of a felony, barred from certain securities-related activities or have filed for bankruptcy."

For non-US managers, registration won't be required if there is no physical presence in the US, there are fewer than 15 US investors, and less than $25 million in assets from US investors.

"We're trying to prevent problems where people have to register twice, once with their own home regulator and once with the SEC," says Andrew Baker, chief executive of the Alternative Investment Managers Association (Aima), who gave an overview of hedge-fund regulation at last week's AsianInvestor Asian Investment Summit held in Hong Kong.

However, the Volcker Rule doesn't look like it can be easily tossed off. Its implementation in some form looks a high probability.

"The Volcker Rule is Ulysseian; banks are tied to the mast," says Goldstein. "They have to dispose of their investment arms rather than making lawmakers and regulators do the hard work of creating rules that outright prohibit the behaviour of concern to them."

Amputation by sale or spin-off of asset-management arms then? As fellow White & Case partner Chris Wells puts it: "What troops do they sacrifice to save the citadel? The Volcker Rule is trying to delineate between traditional activities and fee generators, as against those activities where there are potential conflicts of interest or speculative risk-taking."

What are the core businesses that a firm doesn't want to give up? It depends on the firm. For a securities firm, it's the brokerage, even though M&A advisory may have been the most profitable in recent years. For the big lending institutions, it is corporate banking, and underwriting. But, with lending and underwriting juxtaposed, that too could be a Volckerian conflict.

This all means that prop desks really are in jeopardy, and that trying to 'structure out of the issue' (ie, wiggle out of complying) or simply hoping it will all go away and seeking reinvention as less leveraged versions of themselves (which is what the firms would really prefer to happen) are not feasible solutions for Wall Street firms.

It could be good for these firms' stock prices though, as their riskier businesses spin off and the personnel that manage them depart to set up boutique prop shops and hedge funds.